Boards don't need more of the same

Wednesday 11 March 2009 10:19 BST

This is a hard piece to write without seeming to criticise the individuals concerned, though that is definitely not the intention.

Yet one has to confess to a slight sinking feeling this week at the appointment of Jim Sutcliffe as the new chair of the Actuarial Standards Board and Sir David Currie to the chair at the International Centre for Financial Regulation.

Both candidates are well-qualified for the respective posts. Neither is a surprise. But that is precisely the point.

There is endless talk of widening the pool from which non-executive directors are drawn and there is a widespread recognition, as we learn more about the origins of the banking crisis, that on some boards the non-executives failed to be as robust as expected.

But wherever we look, and whenever a new appointment is announced, it seems to come from the same tight circle of possible candidates.

Though we have external consultants and headhunters and nominations committees and all the paraphernalia of what passes for good governance having their input into the selection process, at the end of the day most boards appoint one of their own.

They feel comfortable doing so because all that governance stuff has served to convince them that they have scoured the field and done all they can to find the best candidate.

The reality, though, is that they will almost always choose someone they are comfortable with - someone who will play the game by the same rules as they do, observe the correct rituals and ask the occasional useful question, but never to such an extent that they will severely rock the boat.

Basically, the non-executive circuit is an utterly class-driven system, with class defined not as an accident of birth or wealth or education, but an accident of career.

The closer the candidate has been to London and the City, the more likely he - and it still almost always is he - is to be on the list.

And once on it, short of actually blowing up the business they are supposed to be looking after, they never really come off it until they do finally choose to retire.

Once again, this is not to single out for criticism the individuals mentioned above, it was simply their misfortune to be appointed this week, and therefore to be used as examples.

The real issue is the self-perpetuating nature of the non-executive elite.

But we have been huffing and puffing for years about the composition of boards and nothing ever changes.

It really is well past time that it did.

Banks crisis: the one key lesson

Battle fatigue is a condition well-known in the armed forces, and indeed among civilians who have been exposed to long periods of strife.

There comes a point where people have had enough - even if they appear to be winning, they just want it to be over.

That is the point at which they can become quite irrational in what they will propose if they think it will bring matters to a close.

In its own way, battle fatigue is beginning to show through in the financial crisis.

People have had enough of the frenzied activity, the huge bailouts, the constant feeling of crisis and the sense that all this effort is not really getting us anywhere.

And it may be because of this mix of frustration and fatigue that today growing numbers of people suggest that banks should be left to their fate. No more bailouts, they say. Let the weak go to the wall.

The irrationality in this is the belief that the benefits of such a policy would outweigh the negatives.

The first problem is that banks today are global when they are alive but local when they are dead.

As going concerns, they operated with global product lines - global equities, global credit and so on - which reported, in Lehman's case, into New York.

But once the bank fails, it is in effect turned on its side and becomes a collection of local businesses with the legal form taking precedence over the operating substance.

Regulators and liquidators in each country take responsibility for their legally registered businesses, which means they have access to one horizontal slice across what was a series of vertical silos.

Overseas branches don't fit comfortably into this, however.

That is tough but it gets tougher when you remember that these businesses were run by computer, meaning that there are no physical records to speak of and the electronic files are most likely to be out of reach in a foreign jurisdiction that is probably not the same place as where the money is.

And the securities could be somewhere else again, held by some global custodian - or in Lehman's case, 97 different custodians - which has to decide which of dozens of conflicting requests from different entities it is going to co-operate with.

There is much more, and unravelling the complexity will take decades and cost an absolute fortune.

No doubt huge lessons will in time be learned about how to deal with a bank insolvency, and learned tomes will be written for the benefit of future generations.

For now though, we only need to learn one thing. Don't let it happen like this again.